What Do Shareholders Really Want?

In a 2010 article in the Harvard Business Review, Roger Martin asks the question “have shareholders actually been better off since they displaced managers as the centre of the business universe? The simple answer is no. From 1933 to the end of 1976, when they were allegedly playing second fiddle to professional management, shareholders of the S&P 500 earned compound annual returns of 7.6%. From 1977 to the end of 2008, they did considerably worse – earning real returns of 5.9% a year. If you modify the start and end dates of the two periods, you can produce performance numbers that are at parity, but there’s no sign that shareholders benefited more when their interests were put first and foremost,” (p.60).

One may be asking why Martin is looking at these specific years and that is because modern capitalism can be broken down into two major areas, the first, managerial capitalism, began in 1932 and was defined by the radical notion that firms ought to have professional management. This period is noted for the famous work by Adolf Berle and Gardiner Means who published their paper entitled “The Modern Corporation and Private Property”, which stated that management should be divorced from ownership.

Then in 1976, the second era of modern capitalism started, when managerial capitalism was strongly criticised by Michael Jensen and William Meckling in their paper entitled “Theory of the Firm: Managerial Behaviour, Agency Costs and ownership Structure. This paper, which Martin highlights has become the most-cited academic paper of all time, argued that “owners were getting short changed from professional managers, who enhanced their own financial well-being rather than that of the shareholders. Stating that managers were squandering corporate and social resources to feather their own nests,” (p.60).

There seems to be a lot of criticism about ‘fat cat’ organisations and their ‘greedy shareholders’ – but how true are these comments in reality. Many institutional shareholders are responsible for pension funds and similar investment vehicles. These portfolio’s aren’t short-term in nature, in fact far from it, these institutional investors are looking for long-term sustainable results – and short-term gains followed by a big loss doesn’t instil confidence in these investors.

Also similar to customer theory, many individual shareholders have unrealistic expectations in respect of investment returns – some are looking for a quick profit for themselves with little concern for the long term interests of the organisation. Wanting to get in and get out with a quick profit – where in this instance the focus of the investor is purely self-interest.

So why is it that companies that don’t focus on maximising shareholder value deliver such impressive returns? Because, says Martin, their CEO’s are free to concentrate on building the real business, rather than managing shareholder expectations. Martin’s article highlights how, back in 1997, just after the IPO, Research in Motion (RIM), makers of the Blackberry, made a rule that any manager who talked about the share price at work had to buy a doughnut for every person in the company. In 2001, the COO mentioned RIM’s surging stock price and was subsequently actioned with buying 800 doughnuts for the employees - apparently he had to make special arrangements to have that many made and delivered. Either way there hasn’t been a recorded infraction of the rule since then, (Martin, R, 2010, p.64).

What organisations want are shareholders who seek an investment that is in the interests of both parties and not the shareholder that has only their self-interest at heart, especially if it’s short term self-interest. These short-term focused investors will never optimise sustainable organisational performance, which is more likely to give greater returns over the long haul and will have little interest in strategies that optimise anything beyond this years returns. A short-sighted view that is likely to lead to long term disaster.

As Martin concludes “managers like profits as much as shareholders do, because the more profits the firm makes, the more money is available to pay managers. In other words, the need for a healthy share price is a natural constraint on any objective you set. Making it the prime objective, however, creates the temptation to trade long-term gains in operations-driven value for temporary gains in expectation-driven value,” (p.65).

References:

Martin, R. (2010). The Age of Customer Capitalism. The Harvard Business Review. Vol. 88, Issue 1, p.58-65.

Are First World Leaders Above the Law?

I overheard a young boy ask his mother for more pocket money the other day. When she explained that she couldn’t afford to give him more, I heard the young man say “but Mum, can’t you just raise your debt ceiling?”

If a Financial Director managed an organisations finances like some first world governments have managed there’s – not only would the individual be fired, but they would also face criminal prosecution and most likely jail time. Are political leaders above the law and if so, aren’t they then exactly the same as the dictators we abhor and vindicate around the world.

First world citizens are beginning to look like puppets, being the easiest bunch of people to be pushed around and dictated to by the very people they ‘democratically’ vote in to power every few years. In the West we have been taught to expect Third World countries to need financial assistance on an annual basis as they try to ‘build their economies’ in order to be able to compete with the First World masters of economic ‘best practice’. But First World countries are showing themselves to be fraudsters when it comes to financial management – and while their own finances get into deeper and deeper trouble, they are still prepared to spend money they don’t even have on an odd war here or to support another country there – with apparently no one to answer or account to. That can’t be right and can’t be democratic, surely?

I have often heard criticism of today’s younger generation for not being responsible – often as a general comment, rather than anything specific – but who’s showing them how to act responsibly. Can we really blame this generation for not being financially astute, when all a country has to do when they need more cash or get into financial trouble is simply to raise their debt ceiling and borrow more cash. What a life – wouldn’t it be great if we could all do that?

Daily, First World countries are seeing an increase in individuals and families suffering from poverty - being made homeless and needing food donations – yet many of these countries are prepared to spend money beyond their shores for no immediate benefit – while leaving their own citizens to suffer. Until you’ve been homeless you can’t underestimate the negative impact this has on individuals and families - the shame, the desperation, the sadness – which can even lead to the ‘head of the household’ committing suicide, as the stresses just become too unbearable.

Many of the political ‘policy makers’ within our First World community sit in their fancy private clubs, sipping their 50 year old whiskies making decisions, with no semblance of understanding of the impact their ‘simple’ decisions have on the lives of the very people they have been put in ‘power’ to help and support.

As much as there appears to be a lot of debate and criticism of the lack of good and effective leadership in business around the world, we actually need these less than perfect business leaders to help gather citizen support to hold their political leaders to account and if necessary to prosecute them as well. These indefensible arrogant and self absorbed politicians need to be held responsible for their actions – since through their decisions, they set the very foundation for their countries organisations to be successful in the global business market, where they can create ‘real’ wealth and employment opportunities.

There still appears to be a dreadful colonial arrogance to political leadership in the First World that can only have a negative impact on the optimal development of our future leaders across all spheres of human interaction. It’s time only true experienced professionals were allowed to lead nations and develop countries….

Are You Empowering Creativity in Your Organisation? Two Key Drivers for Success

Xiaomeng Zhang and Kathryn Bartol (2010) state that “given increasingly turbulent environments, heightened competition, and unpredictable technological change, more and more managers are coming to realize that they should encourage their employees to be creative (Shalley & Gilson, 2004). Considerable evidence indicates that employee creativity can fundamentally contribute to organizational innovation, effectiveness, and survival (Amabile, 1996; Shalley, Zhou, & Oldham, 2004),” (p.107).

Organisational ideas, in respect of opportunities and threats, can come from any level within an organisation and often some of the best ideas come from the most unusual sources. It’s a myth that the leader is solely responsible for ‘idea generation’ and creativity. Leaders want a culture that encourages creative ideas, which then allows the strategic leadership to assess and prioritise these ideas in respect of ROI, time frames, diversification and other key strategic drivers. To get the culture of idea generation, leaders need to empower all employees to be creative

Zhang and Bartol highlight that “creativity refers to the production of novel and useful ideas by an individual or by a group of individuals working together (Amabile, 1988; Madjar, Oldham, & Pratt, 2002; Shalley, Gilson, & Blum, 2000; Zhou & Shalley, 2003). For creativity to occur in organizations, managers need to support and promote it, as they are the individuals who are most knowledgeable about which employees work outcomes should be creative and they have considerable influence over the context within which creativity can occur (Shalley & Gilson, 2004),” (p.107).

What’s interesting is that it’s often assumed that everyone wants to be creative, (given the chance), where theoretical arguments have suggested that psychological empowerment, in turn, makes a critical contribution to employee creativity by positively affecting an employee’s intrinsic motivation (Amabile, 1996; Spreitzer, 1995), but empirical evidence of such an effect has been lacking (Shalley et al., 2004). This connection is important because, conceptually, intrinsic motivation is considered to be a well-established predictor of creativity (Amabile, 1996; Shalley et al., 2004).

Two key drivers influencing the development of an effective creative culture are firstly, the empowerment role identity, which is the extent to which an individual views him or herself as a person who wants to be empowered in a particular job. Then leader encouragement of creativity refers to the extent of a leaders emphasis on an employee being creative and actively engaging in processes that may lead to creative outcomes. (Zhang and Bartol, 2010, p.108)

Zhang and Bartol’s research found that “empowering leadership has the capacity to positively influence employee psychological empowerment, an element of importance in affecting creative outcomes. However, managers are likely to find differences in the extent to which employees wish to be empowered - that is, identify with an employee role that includes empowerment. Hence, managers may find that their empowerment efforts are more successful in engendering cognitions of psychological empowerment in those who view empowerment as part of their role identities. Indeed, evidence suggests that managers do not attempt to empower all employees to the same degree, at least at a given point in time (Forrester, 2000; Yukl & Fu, 1999), a strategy supported by our empowerment role identity findings,” (p.123).

One implication is that, when empowerment role identity is low, leaders may need to expend some time gradually increasing empowerment behaviours so as to encourage employees to begin to view empowerment as part of their role identities. Fortunately, role identity theory suggests that adding role identities is possible through such a process, particularly over time (Stryker, 1980).

Zhang and Bartol's research results suggested that “creativity gains may be boosted if an employee is willing to spend the time and effort necessary to thoroughly identify a problem, search for extensive information, and generate multiple ideas from different perspectives - that is, engage in an effective creative process. Fortunately, our findings also indicate that a leader can play an active role in encouraging such creative process engagement by elucidating to a follower the need for creative outcomes, spelling out what their organization values, and explaining the elements of an effective creative process, such as the one we have considered here. Training employees in creativity-relevant methods or processes is likely to enhance such efforts,” (p.123).

The research is interesting in that it reminds executives and management that not everyone wants to be ‘creative’ to the same degree as everyone else; and it can be dangerous to assume everyone wants to be treated in the same way. As Zhang and Bartol highlight the process involves three key drivers for success: psychological empowerment, intrinsic motivation, and creative process engagement.

The optimum solution for an effective creative culture is understanding, at the individual level, the importance of; the empowerment role identity and the leader’s encouragement of creativity. Understanding the effect of both and optimising both for each employee will give the organisation an effective creative culture.

References

Zhang, X and Bartol, K.M. (2010).Linking Empowering Leadership and Employee Creativity: The Influence of Psychological Empowerment, Intrinsic Motivation and Creative Process Engagement. Academy of Management Journal; Vol. 53 Issue 1, p.107-128.

Regret and Disappointment: Do Customers Respond Differently?

One might think that there is little difference between regret and disappointment yet the reference point for regret is external (encompassing both the chosen option and the foregone alternatives), whereas the reference point for disappointment is internal (encompassing only the chosen option). Disappointment generally leaves one powerless with a tendency to want to get away from everything and not wanting to do or have any association with the outcome (Zeelenberg et al. 1998). Regret, on the other hand, involves feelings of responsibility and results in not being able to get away from such an experience (Das and Kerr, 2010, p.172).

Neel Das and Anthony Kerr explain that “regret is experienced as a result of a comparison between what is and what might have been, where regret may arise as a result of an unfavourable decision-making process or an unfavourable product choice. The important notion to appreciate is that an unfavourable decision-making process is separate from an unfavourable product choice, and individuals may experience regret from either one or both,” (p.172).

Further Marcel Zeelenberg and Rik Pieters suggest that regret is a cognitive emotion, in that it “contains all the elements typical of emotional experiences” (p. 6) such as a sinking feeling, thoughts about opportunities lost, and thoughts about mistakes made and the desire to correct them, if given a chance.

From a customer perspective Das and Kerr state that “only highly involved consumers are likely to adopt a long-term motivational perspective in terms of decision making. In contrast, consumers with low involvement are likely to take a short-term decision-making perspective and not separate an action relating to a decision into separate phases. In other words, highly involved consumers are more likely to separate the source(s) of regret, whereas less-involved consumers would simply recognize that the regret emotion exists without distinguishing the particular source(s) of the emotion.” They furthermore highlight how “regret is viewed as a cognitive emotion; where high need for cognition individuals have a greater tendency to think elaborately on relevant information, compared to low need for cognition individuals,” (p.175).

So what does this mean for customer behaviour and what can organisations learn from understanding the principles of regret and disappointment. Kowalski (1996) describes consumer complaint behaviour as behavioural expressions of dissatisfaction or unfavourable attitudes directed toward an individual, a situation, or an object. Using the disconfirmation paradigm as his basis, Kowalski expressed that complaint behaviour reflects dissatisfaction from an exchange generated from a negative disconfirmation of expectancies. Yet existing regret research in marketing has found no effect of regret on consumer complaint intentions (Tsiros and Mittal 2000). Research has shown that although satisfaction affects complaint intentions, the effects of regret are mediated via satisfaction (Tsiros and Mittal 2000). Essentially, one may be satisfied with the product but may experience regret when a foregone alternative is perceived to perform better than the chosen product. In such a situation, it is not likely for one to complain to the manufacturer (of the chosen product) about another product that is perceived to outperform the chosen one. Switching to a better-performing product in the future is the likely outcome, (Das and Kerr, 2010, p.177).

Also another important factor is that ‘responsibility’ is an important precondition for regret. The more responsible one feels for the decision action, the more regret one is likely to experience subsequent to an unfavourable result (Zeelenberg et al. 1998; 2000). While responsibility is likely to drive the feelings of regret, it may also help consumers adjust their behavioural intentions accordingly. Das and Kerr explain this by stating “regret arising from the decision-making process may be looked upon as an outcome of procedural accountability, and regret arising from the product choice a result of outcome accountability,” (p.178).

In conclusion it should not surprise us to find that the greater the intensity of the regret experienced, the lesser the likelihood of repurchasing the product and the greater the likelihood of switching to a different product in the future.

But what is really interesting is that neither Tsiros and Mittal (2000) nor Zeelenberg and Pieters (2004) found any effects of regret on complaint intentions; which is something organisations need to be aware of in respect of their strategy towards customer service and customer loyalty. Just because your organisation hasn’t had any complaints doesn’t mean the customer is happy with the product or service.

So how are you going to find and retain those customers that regret their purchase from you and next time will buy from one of your competitors?

References

Das, N. and Kerr, A.H. (2010). "Woulda, Coulda, Shoulda": A conceptual examination of the sources of post-purchase regret. Journal of Marketing Theory & Practice; Spring2010, Vol. 18 Issue 2, p.171-180.

Zeelenberg, M. and Pieters, R. (2007). A Theory of Regret Regulation 1.0. Journal of Consumer Psychology, Volume 17 Issue 1, p.3-18.